Marking three years from Nasdaq peak

Stocks face menacing week on anniversary of milestone

SteveGelsi

NEW YORK (CBS.MW) -- U.S. stock markets are heading into yet another week of gloom as investors face the third anniversary of the Nasdaq's all-time high with war and economic woes on the horizon.

The Nasdaq
$COMPQ
hit its loftiest height on March 10, 2000, with a record close of 5,048.

Vince Boberski, chief economist RBC Dain Rauscher, said the Nasdaq defied logic once it crossed the 3,000 mark during the heat of the bull market.

But it kept rising on heavy technology spending to combat Y2K jitters, and optimism about the Internet.

Later that year, it all started to crumble. Investors finished out 2000 with the Dow's first losing year in a decade. The Nasdaq wrapped up the year with a 39 percent loss, the most devastating drop in its 30-year history.

The pain was just starting as a three-year stock slide continues to this day.

The Dow Jones Industrial Average
DJIA, -1.24%
ended the week at 7,740, down 151 points, or 1.9 percent, from its week-ago close of 7,891. The index is won about 7.1 percent for the year.

The Nasdaq
$COMPQ
finished Friday at 1,305, down 32 points, or 2.4 percent from its week-ago close of 1,337. It's off about 2.2 percent so far this year.

The index will head into March 10, 2003, down a whopping 3,743 points, or 74 percent, from its heady all-time close three years ago.

The S&P 500
SPX, -1.54%
wrapped up the first week of March, 2003 at 828, down 12 points, or 1.4 percent from its level of 840 seven days ago. The index of blue chips is down about 5.8 percent so far this year.

Now, Wall Street is eyeing a possible rally if the U.S. does go to war with Iraq and sees a quick victory in the next few days.

A final decision is likely by March 17, the day set forth in a resolution that faces a vote next week at the United Nations. See full story.

Boberski said the S&P 500
SPX, -1.54%
rallied about 10 percent after the 1991 Gulf War, and there's no reason to doubt that some stock market bounce would follow any upcoming victory this year.

The S&P 500 would have to rally about 11 percent from its Friday close to achieve the same price-to-earnings ratio obtained in the stock surge after the 1991 Gulf War, he said.

He added the economy may not be able to nourish a bull market for any significant length of time.

"We'd be skeptical that still shaky fundamentals could sustain that kind of price move," he said. "If you look at the broader economy, companies are still relying on cost cutting for profit growth. You have signs business environment is getting better, but we're not at that point yet."

Another factor in the mix is lower interest rates.

The Federal Open Market Committee will cut rates on March 18, a growing number of Wall Street economists believe. See Economic Preview.

Merrill Lynch, JP Morgan, Daiwa and CIBC World Markets are all predicting a 25 basis point cut in the federal funds rate to 1 percent from 1.25 percent currently.

Consumers are becoming more conservative with their household balance sheets. They've refinanced their mortgages to lower their mortgage payments, rather than taking equity out of their homes.

Energy prices are also troubling.

Crude-oil prices will likely remain above $30 for much of this year, with without a U.S.-led war against Iraq, the president of Strategic Energy & Economic Research said. See full story.

Economic data

Economists are focusing on retail sales data on Thursday to determine if the strength of the almighty consumer is still in place.

With people spending less money on automobiles, market watchers are eager to see if the money may be getting channeled elsewhere into the retail sector.

Economists are expecting a dip of about 0.5 percent, partly because of poor weather conditions in the Northeast.

Higher oil prices will likely cause a rise in the product price index, which is due on Friday.

Boardrooms could be buzzing after Warren Buffett's stern message over the weekend via his highly regarded annual report from his marquee investment and insurance firm, Berkshire Hathaway
BRK.A, -0.29%See full story.

Buffett has been particularly bearish on stocks of late and instead has been focusing on investments outside the equities arena.

War talk

Peter Cardillo, chief strategist for Global Partners, said Wall Street is bracing for military conflict in the next several days, especially after President Bush's press conference on Thursday night.

"There's no question we're on the verge of war here," Cardillo said. "The real question is what comes first, the October lows or military intervention. The market may test those lows. The geopolitical problems continue to direct the market. It looks like a negative quarter."

The Dow hit a low of 7,286 on Oct. 9 of last year. The index ended the week 454 points above that level, but if the Dow keeps selling off by a couple of percentage points a week, it'll be there soon.

"March 10, 2000, was the height of the bull market," Cardillo said. "Now, March 10, 2003, may be a key low of the bear market."

Friday action

Blue chips closed solidly higher on talk of lower interest rates after vacillating on the looming war with Iraq, the economy and corporate earnings.

Weak employment data and a glum report from Intel weighed on markets but gave way to optimism over an interest rate cut.

On the war front, Iraq would be given a week to disarm under a proposed U.N. Security Council resolution to be voted on next week. See full story.

Merrill Lynch -- along with other brokers -- weighed in with a prediction that the Federal Reserve would cut interest rates by 25 basis points at its March 18 meeting, followed by another cut of 25 basis points on May 6. Several other brokerages made similar predictions.

If further stimulus is needed, the Fed may start to buy intermediate and long-term Treasury securities, Merrill said.

The Dow Jones Industrial Average
DJIA, -1.24%
rose 66 to close at 7,740. The Nasdaq
$COMPQ
rose 2 point to 1,305 and the S&P 500
SPX, -1.54%
rose 6 to 828.

"Traders have been swamped with geopolitical and economic news today and are struggling to assimilate it all," noted Bernie Schaeffer, an options trader.

The markets opened lower with the Dow losing as much as 110 points, then it reversed course to march higher on unconfirmed reports that sons of Osama bin Laden had been captured. See full story.

The optimism faded as officials dismissed the report, but then the Dow marched higher in late afternoon action as talk of an interest rate cut arose.

A closely watched speech by United Nations inspections chief Hans Blix failed to provide any resolution. He said Iraq's cooperation is improving and that its destruction of 32 missiles is "significant" but added that more information is needed on underground sites.

"He's not giving us any closure," said Brian Piskorowski of Prudential Securities. "The bin Laden news is creating some short-covering, but even that isn't having much of an effect."

The latest U.S. employment data showed a loss of 308,000 jobs outside the farm sector in February vs. a small gain expected, according to the Labor Department.

Analysts at Thomas Weisel said the report was "much worse than expected, though much of the sizeable decline is attributable to not meeting seasonal expectations."

"In light of all the news that's flowing through today, we're still seeing apathy that's reflected in the low volumes," said Jeff Swensen, trader at Hancock Funds.

The red ink comes after a day of triple-digit losses in the Dow as U.S. indexes scrape lows not seen since October of last year. Japan's stock market hit a 20-year low on Friday as the selling spread throughout the world.

President Bush said in a Thursday night press conference that the U.S. is prepared to prosecute a war against Iraq without approval of the U.N. Security Council.

In the tech sector, shares of Intel
INTC, -1.79%
lost 4 percent to $16.01 as the biggest decliner among the Dow's 30 components. The tech bellwether also pressured the Nasdaq.

The chipmaker said it expects quarterly sales of $6.6 billion to $6.8 billion. The company had previously predicted sales would be between $6.5 billion and $7 billion. Most analysts had expected Intel to leave the upper figure of its revenue-estimate range in place while lifting the lower end. See full story.

UBS Warburg analyst Thornhill lowered his first-quarter earnings forecast for Intel to 11 cents per share from 12 cents per share and cited the chip giant's unsuccessful attempt to raise prices of its flash memory chips.

Carl Wittnebert, director of research at Trim Tabs, a market tracking firm, estimates that U.S. equity funds had outflows of $3.8 billion over the past week ending March 5, compared with outflows of $6.1 billion during the prior week.

Equity funds that invest primarily in U.S. stocks had outflows of $1.8 billion, compared with outflows of $5.6 billion the prior week.

International equity funds had outflows of $1.9 billion, compared with outflows of $500 million for the prior week.

Bond funds had inflows of $2.7 billion, compared with inflows of $2.8 billion the prior week.

Shares of Dow component Alcoa
AA, -3.65%
fell 9 cents to $19.13 after analyst Daniel Roling at Merrill Lynch lowered his first-quarter earnings estimate on the aluminum giant to 15 cents per share from 20 cents per share. He cited continued deterioration in its industrial gas turbines business as well as higher energy costs.

Crude rises, but gold eases

Crude for April delivery rose by 10 cents to $37.10 a barrel on the New York Mercantile Exchange.

April heating oil added 1.34 cents to $1.069 a gallon and April unleaded gasoline added 1.7 cents to $1.123 a gallon.

The dollar was down 0.5 percent vs. the euro at $1.1023.

Gold for April delivery traded as low as $352.80 an ounce, but rose to $353.60 an ounce, down $3.30 on the New York Mercantile Exchange. For the week, however, prices are still around $3 higher. See Metals Stocks.

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